UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  __________  FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the quarterly period ended June 30, 2006  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT  For the transition period from ______ to ______  __________   Commission file number: 0-50765  VILLAGE BANK AND TRUST FINANCIAL CORP. (Exact name of small business issuer as specified in its charter)  Virginia
16-1694602(State or other jurisdiction of
(I.R.S. Employerincorporation or organization)
Identification No.)  1231 Alverser Drive, P.O. Box 330, Midlothian, Virginia  23113 (Address of principal executive offices)  804-897-3900 (Issuers telephone number)   Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes X No__.  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 the latest practicable date:  2,562,088 shares of common stock, $4.00 par value, outstanding as of August 4, 2006.     Village Bank and Trust Financial Corp. Form 10-QSB  TABLE OF CONTENTS  Part I  Financial Information  Item 1.  Financial Statements  Consolidated Balance Sheets June 30, 2006 (unaudited) and December 31, 2005 3  Consolidated Statements of Income For the Three and Six Months Ended June 30, 2006 and 2005 (unaudited) 4  Consolidated Statements of Stockholders Equity For the Six Months Ended June 30, 2006 and 2005 (unaudited) 5  Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2006 and 2005 (unaudited) 6  Notes to Condensed Consolidated Financial Statements (unaudited) 7  Item 2.  Managements Discussion and Analysis or Plan of Operation 11  Item 3.  Controls and Procedures 26   Part II  Other Information  Item 1.  Legal Proceedings 27  Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 27  Item 3.  Defaults Upon Senior Securities 27  Item 4.  Submission of Matters to a Vote of Security Holders 27  Item 5.  Other Information 28  Item 6.  Exhibits 28  Signatures 29   2    PART I  FINANCIAL INFORMATION  ITEM 1  FINANCIAL STATEMENTS Village Bank and Trust Financial Corp. and SubsidiaryConsolidated Balance SheetsJune 30, 2006 (Unaudited) and December 31, 2005June 30,

December 31,2006

2005(Unaudited)AssetsCash and due from banks

$          4,586,668

$         6,386,324Federal funds sold

2,626,518

19,442,230Investment securities available for sale

10,898,659

2,981,903Loans held for sale

2,955,907

2,860,440LoansOutstandings

204,212,522

172,745,040Allowance for loan losses

(2,188,877)

(1,930,999)Deferred fees

(413,914)

(366,768)201,609,731

170,447,273Premises and equipment, net

7,373,040

7,203,760Accrued interest receivable

1,649,857

936,589Goodwill

689,108

689,108Other assets

5,681,152

4,027,325$      238,070,640

$     214,974,952Liabilities and Stockholders' EquityLiabilitiesDepositsNoninterest bearing demand

$        19,739,713

$       16,092,167Interest checking

7,874,152

6,664,602Money market

17,764,973

33,827,042Savings

3,868,002

4,633,280Time deposits of $100,000 and over

44,864,278

38,415,949Other time deposits

107,466,283

87,119,767201,577,401

186,752,807FHLB advances

4,000,000

4,000,000Long-term debt - trust preferred securities

5,155,000

5,155,000Federal funds purchased

954,000

-Other borrowings

158,570

486,810Accrued interest payable

297,313

221,324Other liabilities

978,579

1,207,118Total liabilities

213,120,863

197,823,059Stockholders' equityPreferred stock, $1 par value - 1,000,000 shares authorized;no shares issued and outstanding

-

-Common stock, $4 par value - 10,000,000 shares authorized;2,562,088 shares issued and outstanding at June 30, 2006,1,854,618 shares issued and outstanding at December 31, 2005

10,248,352

7,418,472Additional paid-in capital

13,565,881

9,191,567Accumulated other comprehensive income (loss)

(73,860)

(43,562)Retained earnings

1,209,404

585,416Total stockholders' equity

24,949,777

17,151,893$      238,070,640

$     214,974,952See accompanying notes to consolidated financial statements.   3     Village Bank and Trust Financial Corp. and SubsidiaryConsolidated Statements of IncomeFor the Three and Six Months Ended June 30, 2006 and 2005(Unaudited)Three Months

Six MonthsEnded June 30,

Ended June 30,2006

2005

2006

2005Interest incomeLoans

$          4,266,706

$          2,627,493

$          8,007,243

$          4,949,904Investment securities

40,341

20,916

75,872

68,437Federal funds sold

88,774

43,301

255,081

91,474Total interest income

4,395,821

2,691,710

8,338,196

5,109,815Interest expenseDeposits

1,743,766

935,067

3,334,283

1,790,217Borrowed funds

135,389

160,376

265,723

195,987Total interest expense

1,879,155

1,095,443

3,600,006

1,986,204Net interest income

2,516,666

1,596,267

4,738,190

3,123,611Provision for loan losses

145,761

37,071

363,161

127,604Net interest income after provisionfor loan losses

2,370,905

1,559,196

4,375,029

2,996,007Noninterest incomeService charges and fees

139,369

101,366

262,619

234,658Gain on sale of loans

424,565

541,281

758,176

824,006Loss on securities, net

-

-

-

-Other

71,109

96,108

191,800

179,780Total noninterest income

635,043

738,755

1,212,595

1,238,444Noninterest expenseSalaries and benefits

1,440,562

973,515

2,672,486

1,825,255Occupancy

154,959

86,098

314,628

171,173Equipment

118,178

138,413

218,172

254,742Supplies

81,244

102,458

152,811

162,909Professional and outside services

280,663

246,268

515,668

453,691Advertising and marketing

117,896

42,069

181,463

91,818Other operating expense

295,196

200,941

586,958

359,062Total noninterest expense

2,488,698

1,789,762

4,642,186

3,318,650Net income before income taxes

517,250

508,189

945,438

915,801Provision for income taxes

175,865

172,722

321,450

311,372Net income

$             341,385

$             335,467

$             623,988

$             604,429Earnings per share, basic

$                   0.16

$                   0.19

$                   0.31

$                   0.34Earnings per share, diluted

$                   0.16

$                   0.17

$                   0.30

$                   0.31See accompanying notes to consolidated financial statements.   4     Village Bank and Trust Financial Corp. and SubsidiaryConsolidated Statements of Stockholders' EquityFor the Six Months Ended June 30, 2006 and 2005(Unaudited)AccumulatedCommon Stock

Additional

Retained

OtherNumber of



Paid-in

Earnings

ComprehensiveShares

Amount

Capital

(Deficit)

Income (loss)

TotalBalance, December 31, 2005

1,854,618

$  7,418,472

$  9,191,567

$   585,416

$      (43,562)

$  7,151,893Issuance of common stock

707,470

2,829,880

4,374,314

-

-

7,204,194Net income

-

-

-

623,988

-

623,988Change in unrealized gain(loss) on securitiesavailable for sale

-

-

-

-

(30,298)

(30,298)Total comprehensiveincome (loss)

-

-

-

-

-

593,690Balance, June 30, 2006

2,562,088

$ 0,248,352

$13,565,881

$1,209,404

$      (73,860)

$24,949,777Balance, December 31, 2004

1,761,744

$ 7,046,976

$ 8,615,748

$  (645,767)

$      (31,798)

$14,985,159Issuance of common stock

36,900

147,600

228,780

-

-

376,380Net income

-

-

-

604,429

-

604,429Change in unrealized gain(loss) on securitiesavailable for sale

-

-

-

-

30,290

30,290Total comprehensiveincome (loss)

-

-

-

-

-

634,719Balance, June 30, 2005

1,798,644

$ 7,194,576

$ 8,844,528

$    (41,338)

$        (1,508)

$15,996,258See accompanying notes to consolidated financial statements.                  5     Village Bank and Trust Financial Corp. and SubsidiaryConsolidated Statements of Cash FlowsFor the Six Months Ended June 30, 2006 and 2005(Unaudited)Six MonthsEnded March 31,2006

2005Cash Flows from Operating ActivitiesNet income

$             623,988

$             604,429Adjustments to reconcile net income to netcash provided by (used in) operating activities:Depreciation and amortization

200,509

161,904Provision for loan losses

363,161

127,604Gain on loans sold

(758,176)

(824,006)Proceeds from sale of mortgage loans

32,444,802

35,788,007Origination of mortgage loans for sale

(31,782,094)

(35,573,361)Amortization of premiums and accretion ofdiscounts on securities, net

(20,494)

8,599Increase in interest receivable

(713,268)

(94,021)Increase in other assets

(1,640,781)

(1,387,830)Increase in interest payable

75,989

35,999Increase (decrease) in other liabilities

(228,539)

795,293Net cash used in operating activities

(1,434,902)

(357,383)Cash Flows from Investing ActivitiesPurchases of available for sale securities

(9,183,855)

(10,000,410)Maturities and calls of available for sale securities

1,244,249

12,485,672Net increase in loans

(31,525,619)

(10,442,216)Purchases of premises and equipment

(369,789)

(431,445)Net cash used in investing activities

(39,835,014)

(8,388,399)Cash Flows from Financing ActivitiesIssuance of common stock

7,204,194

376,380Net increase in deposits

14,824,594

3,250,465Proceeds from issuance of trust preferred securities

-

5,155,000Net increase (decrease) in other borrowings

625,760

(747,457)Net cash provided by financing activities

22,654,548

8,034,388Net decrease in cash and cash equivalents

(18,615,368)

(711,394)Cash and cash equivalents, beginning of period

25,828,554

8,599,407Cash and cash equivalents, end of period

$          7,213,186

$          7,888,013See accompanying notes to consolidated financial statements.   6    Notes to Condensed Consolidated Financial Statements (Unaudited)  Note 1 - Principles of presentation  Village Bank and Trust Financial Corp. (the Company) is the holding company of Village Bank (the Bank).  The consolidated financial statements include the accounts of the Company, the Bank and the Banks three wholly-owned subsidiaries, Village Bank Mortgage Corporation, Village Insurance Agency, Inc., and Village Financial Services Corporation.  All material intercompany balances and transactions have been eliminated in consolidation.  In the opinion of management, the accompanying condensed
 consolidated financial statements of the Company have been prepared on the accrual basis in accordance with generally accepted accounting principles for interim financial information.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  However, all adjustments that are, in the opinion of management, necessary for a fair presentation have been included.  The results of operations for the three and six month periods ended June 30, 2006 is not necessarily indicative of the results to be expected for the full year ending December 31, 2006.  The unaudited interim financial statements should be read in conjunction with the audited financial statements and notes to financial statements that are presented in the Companys Annual
Report on Form 10-KSB for the year ended December 31, 2005 as filed with the Securities and Exchange Commission.   Note 2 - Use of estimates  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the statements of financial condition and operations for the period.  Actual results could differ significantly from those estimates.   Note 3 - Earnings per common share  Basic earnings per common share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period.  For the three month periods ended June 30, 2006 and 2005, the weighted-average number of common shares totaled 2,071,159 and 1,783,491, respectively.  For the six month periods ended June 30, 2006 and 2005, the weighted-average number of common shares totaled 1,971,239 and 1,773,720, respectively.  Diluted earnings per share reflects the potential dilution of securities that could share in the net income of the Company.  Outstanding options and warrants to purchase common stock were considered in the computation of diluted earnings per share for the periods presented.  For the three month periods ended June 30, 2006 and 2005, the weighted-average number of common shares on a fully diluted basis totaled 2,163,716 and 2,007,318,
respectively.  For the six month periods ended June 30, 2006 and 2005, the weighted-average number of common shares on a fully diluted basis totaled 2,066,713 and 1,954,678, respectively.  At June 30, 2005, there were options to acquire 35,800 shares of common stock that were anti-dilutive for the six month period ended June 30, 2005, and none that were anti-dilutive for all other periods presented.    7    Note 4  Stock incentive and stock warrant plans  In September and October 2002, the Company completed an offering of units, each of which consisted of one share of its common stock and one warrant to purchase one share of its common stock, through the sale of 817,200 units at a price of $8.50 per unit.  Proceeds to the Company from the offering (net of offering expenses of $624,000) were $6,322,000.  The share of common stock and warrant that comprised each unit traded together for 45 days after the offering, but subsequently traded separately.  The Company also issued 40,860 warrants to the underwriter of the offering.  Each warrant entitled the holder to purchase one share of common stock, at a price of $10.20 per share, at any time through September 27, 2007, unless the warrants were cancelled.  The warrants could be cancelled after December 31, 2003 by the Company in whole or in part upon 30 days written notice if for 20
or more trading days within any period of 30 consecutive trading days, including the last day of the period, the bid price of the stock exceeds $12.75 per share.  On April 26, 2006, the Company announced that it would be canceling these warrants effective June 13, 2006 under this provision of the agreement covering the warrants and, on June 13, 2006, the warrants were canceled.  The cancellation of the common stock warrants resulted in the issuance of 672,638 shares of common stock and the addition of $6,860,908 in capital.  The Organizational Investors Warrant Plan made available 140,000 warrants for grant to the Companys initial (organizational) investors for certain risks associated with the establishment of the Bank.  The warrants have an exercise price of $10 per share (which approximated the fair value per share of common stock at issuance date) and expire in April 2008.  At June 30, 2006, 137,500 warrants had been issued and none had been exercised.  The Company has an Incentive Plan which authorizes the issuance of up to 455,000 shares (increased from 255,000 shares by amendment to the Incentive Plan approved by the Companys shareholders at its 2006 annual meeting on May 23, 2006) of Common Stock to assist the Company in recruiting and retaining key personnel.  The following table summarizes options outstanding under this plan:  Six Months Ended June 30,2006

2005Weighted



WeightedAverage



AverageExercise



ExerciseOptions

Price

Options

PriceOptions outstanding at beginning of period

241,660

$      9.80

197,410

$      9.14Granted

16,500

12.50

11,300

11.97Forfeited

(250)

11.77

-

-Exercised

(6,000)

8.20

-

-Options outstanding at end of period

251,910

$   10.02

208,710

$      9.29Options exercisable at end of period

251,910



123,060Fair value per share of optionsgranted during the period

$       5.03



$       4.51   Prior to January 1, 2006, the Company applied Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees (APB 25), in accounting for stock options granted to employees and directors pursuant to the Incentive Plan.  Under APB 25, compensation expense was determined  8    based upon the fair value of the
awards at the grant date consistent with the method under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), and the impact of this expense on net income and earnings per share was disclosed in the notes to financial
 statements.  Effective January 1, 2006, the Company adopted SFAS No. 123 (Revised 2004), Share-Based Payment, issued in December 2004,
 a revision of SFAS 123, and superseding APB 25, and its related implementation guidance.  SFAS 123 (Revised 2004) requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost is recognized over the period during which an employee is required to provide service in
exchange for the award rather than disclosed in the financial statements.  During the three months ended June 30, 2006, the Company granted
16,500 stock options to executive officers, the expense of which was not material to the results of operations for the period then ended.  Note 5  Trust preferred securities  During the first quarter of 2005, Southern Community Financial Capital Trust I, a wholly-owned subsidiary of the Company, was formed for the purpose of issuing redeemable securities.  On February 24, 2005, $5.2 million of Trust Preferred Capital Notes were issued through a pooled underwriting.  The securities have a LIBOR-indexed floating rate of interest (three-month LIBOR plus 2.15%) which adjusts, and is payable, quarterly. The interest rate at June 30, 2006 was 7.48%. The securities may be redeemed at par beginning on March 15, 2010 and each quarter after such date until the securities mature on March 15, 2035.  The principal asset of the Trust is $5.2 million of the Companys junior subordinated debt securities with like maturities and like interest rates to the Trust Preferred Capital Notes.  The Trust Preferred Capital Notes may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier 1 capital after its inclusion.  The portion of the Trust Preferred Capital Notes not considered as Tier 1 capital may be included in Tier 2 capital.  The obligations of the Company with respect to the issuance of the Trust Preferred Capital Notes constitute a full and unconditional guarantee by the Company of the Trusts obligations with respect to the Trust Preferred Capital Notes.  Subject to certain exceptions and limitations, the Company may elect from time to time to defer interest payments on the junior subordinated debt securities, which would result in a deferral of distribution payments on the related Trust Preferred Capital Notes and require a deferral of common dividends.  Note 6  New accounting standards  In March 2006, the Financial Accounting Standards Board (the FASB)
issued Statement No. 156, Accounting for Servicing of Financial Assets, which is an amendment of Statement No. 140, intended to simplify the accounting for servicing assets and liabilities, such as those common with mortgage securitization activities. Statement No. 156 is effective for years beginning after September 15, 2006, although earlier adoption is permitted. Management has not completed its review of the new guidance; however, the effect of the standards adoption is not expected to be material.  In July 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes thresholds and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 will become effective January 1, 2007.  Management has not completed its review of the new guidance; however, the effect of FIN 48s adoption is not expected to be material.   9    Other proposals, interpretations of existing pronouncements or FASB staff positions have been recently issued which include the following:   FASB FSP to require recalculation of leveraged leases if the timing of tax benefits affect cash flows;  Emerging Issues Task Force (EITF) Issue No. 06-4 which addresses accounting for deferred compensation and post retirement benefits of endorsement split-dollar life insurance; and  EITF Issue No. 06-5 which encompasses accounting for purchases of life insurance and the ramifications of determining the amount that could be realized in accordance with FASB Technical Bulletin 84-4.  Management has not completed its analysis of this new guidance (as proposed, where applicable) although it anticipates their potential impact (if finalized, where applicable) would not be material to the Companys consolidated financial statements.  A variety of proposed or otherwise potential accounting standards are currently under study by standardsetting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material to the Companys consolidated financial statements.  10    ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION   Forward-Looking Statements  Certain information contained in this discussion may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  These forward-looking statements are generally identified by phrases such as we expect, we believe or words of similar import.  Such forward-looking statements involve known and unknown risks including, but not limited to, the following factors:   interest rate fluctuations;  risk inherent in making loans such as repayment risks and fluctuating collateral values;  economic conditions in the Richmond metropolitan area;  the ability to continue to attract low cost core deposits to fund asset growth;  changes in general economic and business conditions;  changes in laws and regulations applicable to us;  competition within and from outside the banking industry;  the ability to successfully manage the Companys growth or implement its growth strategies if it is unable to identify attractive markets, locations or opportunities to expand in the future;  maintaining capital levels adequate to support the Companys growth;  reliance on the Companys management team, including its ability to attract and retain key personnel;  new products and services in the banking industry;  problems with our technology, and  changing trends in customer profiles and behavior.  Although we believe that our expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of our knowledge of our business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.  General  The Company was organized under the laws of the Commonwealth of Virginia as a bank holding company whose activities consist of investment in its wholly-owned subsidiary, the Bank.  The Bank is engaged in commercial and retail banking.  We opened to the public on December 13, 1999.  We place special emphasis on serving the financial needs of individuals, small and medium sized businesses, entrepreneurs, and professional concerns.  The Bank has three subsidiaries: Village Bank Mortgage Company, Village Insurance Agency, Inc., and Village Financial Services Corporation.  Through our combined companies, we offer a wide range of banking and related financial services, including checking, savings, certificates of deposit and other depository services, and commercial, real estate and consumer loans.  We are a community-oriented and locally owned and managed financial institution focusing on providing a high level of responsive and personalized services to our customers, delivered in the context of a strong direct relationship with the customer.  We conduct our operations from our main office/corporate headquarters location and seven branch offices.    11    Our total assets increased to $238,071,000 at June 30, 2006 from $214,975,000 at December 31, 2005, a 10.7% increase.  During this period, net loans increased by $31.2 million which was funded by a decrease in federal funds sold of $16.8 million and an increase in deposits of $14.8 million.  This results in higher yielding assets as interest rates on loans are higher than on federal funds sold. However, our cost of funds, primarily interest on deposits, is also increasing as interest rates continue to rise.  The following presents managements discussion and analysis of the financial condition of the Company at June 30, 2006 and December 31, 2005, and results of operations for the Company for the three and six month periods ended June 30, 2006 and 2005.  This discussion should be read in conjunction with the Companys Annual Report on Form 10-KSB for the year ended December 31, 2005 as filed with the Securities and Exchange Commission as well as the second quarter 2006 financial statements and notes thereto appearing elsewhere in this report.  Results of operations  Net income totaled $341,000, or $0.16 per share on a fully diluted basis, in the second quarter of 2006 compared to net income of $335,000, or $0.17 per share on a fully diluted basis, in the second quarter of 2005.  While the Companys earnings in the second quarter
 of 2006 showed a small increase over the earnings for the same period in 2005, the components of the results were significantly different.  The
 Companys primary source of income, net interest income, increased by $920,000, or 57.7%, from $1,596,000 in the second quarter of 2005 to $2,517,000
 in the second quarter of 2006.  However, noninterest income decreased by $104,000, or 14.0%, from $739,000 in the second quarter of 2005 to $635,000 in the second
quarter of 2006.  Noninterest expense increased by $699,000, or 39.1%, from $1,790,000 in the second quarter of 2005 to $2,489,000 in
 the second quarter of 2006.  The decline in noninterest income is directly attributable to a slowdown in our mortgage banking activities.  Gain on sale of loans declined to $424,000 in the second quarter of 2006 from $541,000 in the second quarter of 2005, a decrease of $117,000, or 21.6%.  This decline in mortgage banking activities could continue if interest rates stay at the current levels or increase.  If this occurs, it could have a negative impact on our future earnings.  The increases in the components of our earnings are attributable to the growth and expansion of the Bank.  This growth is demonstrated in the following schedule (dollars in thousands):  June 30,

Increase2006

2005

Amount

PercentTotal assetsAt period end

$ 238,071

$ 169,805

$    68,266

40.20%Average for the quarter

227,285

169,591

57,694

34.02%Loans, net of unearned incomeAt period end

203,799

146,116

57,683

39.48%Average for the quarter

197,679

145,768

51,911

35.61%DepositsAt period end

201,577

143,278

58,299

40.69%Average for the quarter

199,640

143,857

55,783

38.78%Number of offices

8

5

3

60.00%   12    Similar to the results of the quarter to quarter comparison, net income of $624,000 for the six months
ended June 30, 2006 was only 3.2% higher than the $604,000 earned for the same period in 2005.  The
components of the results, however, did change significantly.  Net interest income increased by $1,614,000, or 51.7%,
from $3,124,000 in the first six months of 2005 to $4,738,000 in the first six months of 2006.  Noninterest income
decreased by $26,000, or 2.1%, from $1,238,000 in the first six months of 2005 to $1,212,000 in the first six months of
 2006.  Noninterest expense increased by $1,324,000, or 39.9%, from $3,318,000 in the first six months of 2005 to
$4,642,000 in the first six months of 2006.  As discussed previously, the decline in noninterest income is directly attributable to a slowdown in our mortgage banking activities.  Gain on sale of loans declined to $758,000 in the first six months of 2006 from $824,000 in the first six months of 2005, a decrease of $66,000, or 8.0%.  The increases in the components of our earnings are attributable to the growth and expansion of the Bank.  Our strategy has been and remains to invest some of our earnings in growth of the Bank.  This strategy will depress earnings somewhat in the short-term but we believe it to the best way to build shareholder value in the long-term.  Net interest income  Net interest income is our primary source of earnings and
represents the difference between interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities.  The
 level of net interest income is affected primarily by variations in the volume and mix of those assets and liabilities, as well as changes in interest
 rates when compared to previous periods of operation.  Net interest income for the six months ended June 30, 2006
and 2005 was $4,738,000 and $3,124,000, respectively.  This increase of $1,614,000, or 51.7%, in net interest income was due to growth in loans and an
improved net interest margin.  Net loans increased by $57,683,000, or 39.5%, from $146,116,000 at June 30, 2005 to $203,799,000 at June 30, 2006.  Net
loans averaged $189,903,000 in the first six months of 2006 as compared to $140,509,000  in the first six months of 2005, an increase of $49,394,000, or 35.2%.  In
 addition, our net interest margin for the six months ended June 30, 2006 was 4.65% compared to 4.06% for the first six months of 2005.  This improvement in our net
 interest margin is due to the recent increases in the prime interest rate resulting from the increases in short-term interest rates by the Federal Reserve.  While
these increases in short-term
interest rates have increased our net interest income, we expect continued increases in short-term rates, should they occur, to slow loan growth and
 increase our cost of funds.  Average interest-earning assets for the first six months of 2006
increased by $50,284,000, or 29.7%, compared to the first six months of 2005.  The increase in interest-earning assets was due primarily to the growth of our loan portfolio.  The average yield on interest-earning assets increased to 8.18% for the first six months of 2006 compared to 6.65% for the first six months of 2005.  The increase in the average yields from 2005 to 2006 was due primarily to the increases in short-term interest rates by the Federal Reserve.  Our average interest-bearing liabilities increased by $44,847,000,
 or 32.3%, for the first six months of 2006 compared to the first six months of 2005.  The growth in interest-bearing liabilities was primarily due to strong growth in deposits.  The average cost of interest-bearing liabilities increased to 3.95% for the first six months of 2006 from 2.88% for the first six months of 2005.  The principal reasons for the increase in the liability costs was the rise in short-term rates by the Federal Reserve discussed previously and an increase in our borrowing costs associated with the issuance of trust preferred securities.  See our discussion of interest rate sensitivity below for more information.   13   The following table
 illustrates average balances of total
 interest-earning assets and total interest-bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, shareholders' equity and related income, expense and corresponding weighted-average yields and rates.  The average balances used in these tables and other statistical data were calculated using daily average balances.  We had no tax exempt assets for the periods presented.  Average Balance Sheets(In thousands)Six Months Ended June 30, 2006

Six Months Ended June 30, 2005Interest

Annualized



Interest

AnnualizedAverage

Income/

Yield

Average

Income/

YieldBalance

Expense

Rate

Balance

Expense

RateGross loans

$ 189,471

$     7,950

8.46%

$ 140,509

$     4,878

7.00%Investment securities

3,182

76

4.82%

5,037

68

2.72%Loans held for sale

1,777

57

6.47%

2,479

72

5.86%Federal funds and other

11,154

255

4.61%

6,972

92

2.66%Total interest earning assets

205,584

8,338

8.18%

154,997

5,110

6.65%Allowance for loan losses

(2,044)





(1,584)Cash and due from banks

2,264





6,384Premises and equipment, net

7,327





6,307Other assets

6,479





3,222Total assets

$ 219,610





$ 169,326Interest bearing depositsInterest checking

$     7,624

$          39

1.03%

$     7,328

$          33

0.91%Money market

25,789

443

3.46%

22,393

221

1.99%Savings

4,201

24

1.15%

4,807

27

1.13%Certificates

136,794

2,828

4.17%

96,154

1,509

3.16%Total deposits

174,408

3,334

3.85%

130,682

1,790

2.76%Borrowings

9,475

266

5.66%

8,354

196

4.73%Total interest bearing liabilities

183,883

3,600

3.95%

139,036

1,986

2.88%Noninterest bearing deposits

15,685





13,637Other liabilities

1,119





1,057Total liabilities

200,687





153,730Equity capital

18,923





15,596Total liabilities and capital

$ 219,610





$ 169,326Net interest income beforeprovision for loan losses



$     4,738





$     3,124Interest spread - average yield on interestearning assets, less average rate oninterest bearing liabilities





4.23%





3.77%Annualized net interest margin (netinterest income expressed aspercentage of average earning assets)




4.65%





4.06%     14    Provision for loan losses  The provision for loan losses for the six months ended June 30, 2006 was $363,000, compared to $128,000 for the six months ended June 30, 2005.  The 184.6% increase from 2005 to 2006 was due to the higher loan volume in 2006 as compared to 2005.  Net loans increased by $31,420,000 in the first six months of 2006 compared to an increase of $10,440,000 in the first six months of 2005.  The amount of the loan loss provision is determined by an evaluation of the level of loans outstanding, the level of non-performing loans, historical loan loss experience, delinquency trends, the amount of actual losses charged to the reserve in a given period and assessment of present and anticipated economic conditions.  See our discussion of the allowance for loan losses under Allowance for loan losses and Critical accounting policies below.  Noninterest income  Noninterest income decreased from $1,238,000 for the first six months of 2005 to $1,212,000 for the first six months of 2006, a $26,000, or 2.1%, decrease.  The decline in noninterest income is directly attributable to a slowdown in our mortgage banking activities.  Gains on loan sales declined to $758,000 for the first six months of 2006 from $824,000 for the first six months of 2005, a $66,000, or 8.0%, decrease.  This decline in mortgage banking activities could continue if interest rates stay at the current levels or increase.  This could have a negative impact on our future earnings, and, if a slowdown in mortgage banking activity continues, we will take action to reduce overhead associated with this activity to minimize its impact.  Noninterest expense  Noninterest expense for the six months ended June 30, 2006 totaled $4,642,000, an increase of $1,323,000, or 39.9%, from $3,319,000 for the six months ended June 30, 2005.  Salaries and benefits represented the largest increase, increasing by $847,000, or 46.4%, for the first six months of 2006 to $2,672,000, compared to $1,825,000 for the first six months of 2005.  This increase and other increases in noninterest expense were primarily attributable to the growth of the Company both in personnel and new branches.  Income taxes  The provision for income taxes for the six months ended June 30, 2006 is based upon the results of operations.  Certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate.  The Company must also evaluate the likelihood that deferred tax assets will be recovered from future taxable income.  If any such assets are not likely to be recovered, a valuation allowance must be recognized.  We determined that a valuation allowance was not required for deferred tax assets as of June 30, 2006.  The assessment of the carrying value of deferred tax assets is based on certain assumptions, changes in which could have a material impact on the Companys financial statements.  Commercial banking organizations conducting business in Virginia are not subject to Virginia income taxes.  Instead, they are subject to a franchise tax based on bank capital.  The Company recorded a franchise tax expense of $60,000 for each of the six months ended June 30, 2006 and 2005.   15   Loan portfolio  The following table presents the composition of our loan portfolio (excluding mortgage loans held for sale) at the dates indicated. Loan Portfolio, Net
(In thousands)June 30, 2006

December 31, 2005Amount

%

Amount

%Commercial

$    16,502

8.1%

$    14,121

8.2%Real estate - residential

31,653

15.5%

30,043

17.4%Real estate - commercial

82,266

40.3%

66,274

38.4%Real estate - construction

67,439

33.0%

56,146

32.5%Consumer

6,353

3.1%

6,161

3.5%Total loans

204,213

100.0%

172,745

100.0%Less:  unearned income, net

(414)



(367)Less:  Allowance for loan losses

(2,189)



(1,931)Total loans, net

$  201,610



$  170,447     Allowance for loan losses  The allowance for loan losses at June 30, 2006 was $2,189,000, compared to $1,931,000 at December 31, 2005.  The ratio of the allowance for loan losses to gross portfolio loans (net of unearned income and excluding mortgage loans held for sale) at June 30, 2006 and December 31, 2005 was 1.07% and 1.12%, respectively.  The amount of the loan loss provision is determined by an evaluation of the level of loans outstanding, the level of non-performing loans, historical loan loss experience, delinquency trends, the amount of actual losses charged to the reserve in a given period and assessment of present and anticipated economic conditions.  See our discussion of the allowance for loan losses under Critical accounting policies below.   16    The following table presents an analysis of the changes in the allowance for loan losses for the periods indicated.  Analysis of Allowance for Loan Losses(In thousands)Six Months EndedJune 30,2006

2005Beginning balance

$         1,931

$         1,514Provision for loan losses

363

128Charge-offs - commercial

(105)

(4)Recoveries

-

1Ending balance

$         2,189

$         1,639Loans outstanding at end of period (1)

$     203,799

$     146,116Ratio of allowance for loan losses asa percent of loans outstanding atend of period

1.07%

1.12%Average loans outstanding for the period (1)

$     189,471

$     140,509Ratio of net charge-offs to average loansoutstanding for the period

0.06%

0.00%(1)  Loans are net of unearned income.      17    Investment portfolio  At June 30, 2006 and December 31, 2005, all of our securities were classified as available-for-sale.  The following table presents the composition of our investment portfolio at the dates indicated.  Investment Securities Available-for-Sale(Dollars in thousands)Unrealized

EstimatedPar

Amortized

Gain

Fair

AverageValue

Cost

(Loss)

Value

YieldJune 30, 2006US Government AgenciesWithin one year

$    8,605

$    8,593

$         (7)

$    8,586

5.09%One to five years

360

360

(11)

349

4.65%More than five years

1,790

1,790

(84)

1,706

4.97%Total

10,755

10,743

(102)

10,641

5.05%Mortgage-backed securitiesMore than five years

203

204

4

208

3.64%Other investmentsMore than five years

50

50

-

50

3.92%Total investment securities

$  11,008

$  10,997

$       (98)

$  10,899

5.02%December 31, 2005US Government AgenciesWithin one year

$      605

$      599

$         (1)

$      598

4.36%One to five years

360

360

(10)

350

4.65%More than five years

1,790

1,790

(49)

1,741

4.97%Total

2,755

2,749

(60)

2,689

4.79%Mortgage-backed securitiesMore than five years

237

238

5

243

3.64%Other investmentsMore than five years

50

50

-

50

3.92%Total investment securities

$    3,042

$    3,037

$       (55)

$    2,982

4.69%     18    Goodwill  Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is evaluated at least annually for impairment by comparing its fair value with its recorded amount and is written down when appropriate.  Projected net operating cash flows are compared to the carrying amount of the goodwill recorded and if the estimated net operating cash flows are less than the carrying amount, a loss is recognized to reduce the carrying amount to fair value.  Goodwill of $689,000 at June 30, 2006 was related to the Banks acquisition of Village Bank Mortgage in 2003.  There was no impairment of goodwill at June 30, 2006.  Deposits  Total deposits increased by $14,825,000, or 7.9%,
during the first six months of 2006 as compared to an increase of $3,250,000, or 2.3%, during the first six months of 2005.  The increase in deposits in 2006 resulted from increases in checking accounts of $4,857,000 and certificates of deposit of $26,750,000, offset by a decline in money market accounts of $16,062,000.  The increases in checking accounts and certificates of deposit were due primarily to the efforts of our two newest branches opened in 2006 and an increase in interest rates on certificates of deposit.  The decline in money market accounts occurred as a result of the loss of $18,887,000 in a money market account with a local brokerage company, Anderson & Strudwick, as disclosed in the Quarterly Report on Form 10-QSB for the period ended March 31, 2006.  In 2005, the increase in deposits resulted primarily from an increase
of $2,531,000 in noninterest demand accounts and an increase
of $2,100,000 in time deposits, offset by a $2,349,000 decline in money market accounts.  The mix of our deposits continues to be weighted
toward time deposits which represent 75.6% of our total deposits at June 30, 2006 as compared to 67.2% at December 31, 2005 (the loss of the money market account discussed previously was the primary reason for the increase in this percentage).  As a result, our cost of funds is higher than we would like and we are striving to change this mix more toward lower cost checking accounts.  As our branch network increases and becomes more convenient to a larger segment of our targeted customer base, we believe that a move to a higher percentage of our deposits in checking accounts will occur.  Additionally, we are emphasizing checking account deposit growth at our existing branches.  The average cost of interest-bearing deposits for
the six months ended June 30, 2006 and 2005 was 3.85% and 2.76%, respectively.  This increase in our average cost of interest-bearing deposits has mirrored the overall increase in interest rates resulting from the actions by the Federal Reserve to increase short-term interest rates.  We expect this increase in our cost of deposits to increase if the Federal Reserve continues to increase short-term interest rates.  The variety of deposit accounts that we offer has
 allowed us to be competitive in obtaining funds and has allowed us to respond with flexibility to, although not to eliminate, the threat of disintermediation (the flow of funds away from depository institutions such as banking institutions into direct investment vehicles such as government and corporate securities).  Our ability to attract and retain deposits, and our cost of funds, has been, and is expected to continue to be, significantly affected by money market conditions.  Borrowings  We use borrowings to supplement deposits when they
are available at a lower overall cost to us or they can be invested at a positive rate of return.  19    As a member of the Federal Home Loan Bank of Atlanta (FHLB), the Bank is required to own
capital stock in the FHLB and is authorized to apply for borrowings from the FHLB.  Each FHLB credit program has its own interest rate, which may be fixed or variable, and range of maturities.  The FHLB may prescribe the acceptable uses to which the advances may be put, as well as on the size of the advances and repayment provisions.  Borrowings from the FHLB were $4,000,000 at June 30, 2006 and December 31, 2005.  The FHLB advances are secured by the pledge of first mortgage loans and the pledge of our FHLB stock.  Capital resources  Stockholders equity at June 30, 2006 was $24,950,000, compared to $17,152,000 at December 31, 2005.  The $7,798,000 increase in equity during the first six months of 2006 was due to proceeds from the issuance of common stock of $7,204,000 and net income of $624,000.  The proceeds from the exercise of stock was primarily attributable to the cancellation of stock warrants discussed in Note 4 to the Financial Statements.  Stockholders equity at June 30, 2005 was $15,996,000, compared to $14,985,000 at December 31, 2004.  The $1,011,000 increase in equity during the first six months of 2005 was due to proceeds from the issuance of common stock of $376,000 from the exercise of stock warrants and net income of $604,000.  During the first quarter of 2005, the Company issued $5.2 million in Trust Preferred Capital Notes.  The Trust Preferred Capital Notes may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier 1 capital after its inclusion.   20    The following table presents the composition of regulatory capital and the capital ratios at the dates indicated.  Analysis of Capital(In thousands)June 30,

December 31,2006

2005Tier 1 capitalCommon stock

$       10,248

$         7,418Additional paid-in capital

13,566

9,192Retained earnings

1,209

585Net unrealized losses on securities

74

44Qualifying trust preferred securities

5,000

5,000Total equity

30,097

22,239Less: goodwill

(689)

(689)Total Tier 1 capital

29,408

21,550Tier 2 capitalAllowance for loan losses

2,189

1,931Total Tier 2 capital

2,189

1,931Total risk-based capital

31,597

23,481Risk-weighted assets

$     234,894

$     191,413Capital ratiosTier 1 capital to risk-weighted assets

12.5%

11.3%Total capital to risk-weighted assets

13.5%

12.3%Leverage ratio (Tier 1 capital toaverage assets)

12.6%

10.0%Equity to total assets

10.5%

8.0%   Liquidity  Liquidity provides us with the ability to meet normal deposit withdrawals, while also providing for the credit needs of customers.  We are committed to maintaining liquidity at a level sufficient to protect depositors, provide for reasonable growth, and fully comply with all regulatory requirements.  At June 30, 2006, cash, cash equivalents and investment securities available for sale totaled $18,112,000, or 7.6% of total assets, which we believe is adequate to meet short-term liquidity needs.  At June 30, 2006, we had commitments to originate $103,717,000 of loans.  Fixed commitments to incur capital expenditures were less than $25,000 at June 30, 2006.  Time deposits scheduled to mature in the 12-month period ending June 30, 2007 totaled $112,577,000 at June 30, 2006. We believe that a significant portion of such deposits will remain with us.  We further believe that loan repayments and other sources of funds
such as deposit growth will be adequate to meet our foreseeable short- and long-term liquidity needs.  21     Interest rate sensitivity  An important element of asset/liability management is the monitoring of our sensitivity to interest rate movements.  In order to measure the effects of interest rates on our net interest income, management takes into consideration the expected cash flows from the securities and loan portfolios and the expected magnitude of the repricing of specific asset and liability categories.  We evaluate interest sensitivity risk and then formulate guidelines to manage this risk based on managements outlook regarding the economy, forecasted interest rate movements and other business factors.  Our goal is to maximize and stabilize the net interest margin by limiting exposure to interest rate changes.  Contractual principal repayments of loans do not necessarily reflect the actual term of our loan portfolio.  The average lives of mortgage loans are substantially less than their contractual terms because of loan prepayments and because of enforcement of due-on-sale clauses, which gives us the right to declare a loan immediately due and payable in the event, among other things, the borrower sells the real property subject to the mortgage and the loan is not repaid.  In addition, certain borrowers increase their equity in the security property by making payments in excess of those required under the terms of the mortgage.  The sale of fixed rate loans is intended to protect us from precipitous changes in the general level of interest rates. The valuation of adjustable rate mortgage loans is not as directly dependent on the level of interest rates as is the value of fixed rate loans.  As with other investments, we regularly monitor the appropriateness of the level of adjustable rate mortgage loans in our portfolio and may decide from time to time to sell such loans and reinvest the proceeds in other adjustable rate investments.  The data in the following table reflects repricing or expected maturities of various assets and liabilities at June 30, 2006.  The gap analysis represents the difference between interest-sensitive assets and liabilities in a specific time interval.  Interest sensitivity gap analysis presents a position that existed at one particular point in time, and assumes that assets and liabilities with similar repricing characteristics will reprice at the same time and to the same degree.  22     Interest Rate Sensitivity GAP AnalysisJune 30, 2006(In thousands)Within 3

3 to 6

6 to 12

13 to 36

More thanMonths

Months

Months

Months

36 Months

TotalInterest Rate Sensitive AssetsLoans (1)Fixed rate

$     1,645

$     2,256

$     3,780

$     3,894

$   11,982

$  23,557Variable rate

131,013

6,772

4,141

16,824

21,906

180,656Investment securities

8,586

-

-

-

2,315

10,901Loans held for sale

2,956

-

-

-

-

2,956Federal funds sold

2,627

-

-

-

-

2,627Total rate sensitive assets

146,827

9,028

7,921

20,718

36,203

220,697Cumulative rate sensitive assets

146,827

155,855

163,776

184,494

220,697Interest Rate Sensitive LiabilitiesInterest checking (2)

-

-

-

7,874

-

7,874Money market accounts

17,765

-

-

-

-

17,765Savings (2)

-

-

-

3,868

-

3,868Time deposits

22,397

19,354

70,826

24,733

15,019

152,329FHLB advances

-

-

-

4,000

-

4,000Trust preferred securities

-

-

-

-

5,155

5,155Other borrowings

1,113

-

-

-

-

1,113Total rate sensitive liabilities

41,275

19,354

70,826

40,475

20,174

192,104Cumulative rate sensitive liabilities

41,275

60,629

131,455

171,930

192,104Rate sensitivity gap for period

$ 105,552

$  (10,326)

$  (62,905)

$  (19,757)

$   16,029

$   28,593Cumulative rate sensitivity gap

$ 105,552

$   95,226

$   32,321

$   12,564

$   28,593Ratio of cumulative gap to total assets

44.3%

40.0%

13.6%

5.3%

12.0%Ratio of cumulative rate sensitiveassets to cumulative rate sensitiveliabilities

355.7%

257.1%

124.6%

107.3%

114.9%Ratio of cumulative gap to cumulativerate sensitive assets

71.9%

61.1%

19.7%

6.8%

13.0%(1) Includes nonaccrual loans of $1,194,000, which are spread throughout the categories.(2) Management believes that interest checking and savings accounts are generally not sensitive to changes in interestrates and therefore has placed such deposits in the "13 to 36 months" category.   At June 30, 2006, our assets that reprice within one year exceeded liabilities that reprice within one year by $32,321,000 and therefore we were in an asset sensitive position.
An asset positive position, or positive gap, can adversely affect earnings
in periods of falling interest rates, but can improve earnings in periods of rising interest rates.  This positive
position is due primarily to our adjustable rate loan portfolio.  23    Critical accounting policies  The financial condition and results of operations presented in the financial statements, accompanying notes to the financial statements and management's discussion and analysis are, to a large degree, dependent upon our accounting policies.  The selection and application of these accounting policies involve judgments, estimates, and uncertainties that are susceptible to change.  Presented below is a discussion of those accounting policies that management believes are the most important accounting policies to the portrayal and understanding of our financial condition and results of operations.  These critical accounting policies require management's most difficult, subjective and complex judgments about matters that are inherently uncertain.  In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.  See also Note 1 of the Notes to Consolidated Financial Statements filed with the Companys Annual Report on Form 10-KSB for the year ended December 31, 2005.  We monitor and maintain an allowance for loan losses to absorb an estimate of probable losses inherent in the loan portfolio.  We maintain policies and procedures that address the systems of controls over the following areas of maintenance of the allowance:  the systematic methodology used to determine the appropriate level of the allowance to provide assurance they are maintained in accordance with accounting principles generally accepted in the United States of America; the accounting policies for loan charge-offs and recoveries; the assessment and measurement of impairment in the loan portfolio; and the loan grading system.  We evaluate various loans individually for impairment as required by Statement of Financial Accounting Standards (SFAS) 114, Accounting by Creditors for Impairment of a Loan, and SFAS 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures.  Loans evaluated individually for impairment include non-performing loans, such as loans on non-accrual, loans past due by 90 days or more, restructured loans and other loans selected by management.  The evaluations are based upon discounted expected cash flows or collateral valuations.  If the evaluation shows that a loan is individually impaired, then a specific reserve is established for the amount of impairment.  If a loan evaluated individually is not impaired, then the loan is assessed for impairment under SFAS 5, Accounting for Contingencies, with a group of loans that have similar
characteristics.  For loans without individual measures of impairment, we make estimates of losses for groups of loans as required by SFAS 5.  Loans are grouped by similar characteristics, including the type of loan, the assigned loan classification and the general collateral type.  A loss rate reflecting the expected loss inherent in a group of loans is derived based upon estimates of default rates for a given loan grade, the predominant collateral type for the group and the terms of the loan.  The resulting estimate of losses for groups of loans is adjusted for relevant environmental factors and other conditions of the portfolio of loans and leases, including:  borrower and industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes in underwriting standards and risk selection; level of experience, ability and depth of lending management; and national and local economic
conditions .  The amounts of estimated impairment for individually evaluated loans and groups of loans are added together for a total estimate of loan losses.  This estimate of losses is compared to our allowance for loan losses as of the evaluation date and, if the estimate of losses is greater than the allowance, an additional provision to the allowance would be made.  If the estimate of losses is less than the allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether the allowance falls outside a range of estimates.  If the estimate of losses is below the range of reasonable estimates, the allowance would be reduced by way of a credit to the provision  24    for loan losses.  We recognize the inherent imprecision in estimates of losses due to various uncertainties and variability related to the factors used, and therefore a reasonable range around the estimate of losses is derived and used to ascertain whether the allowance is too high.  If different assumptions or conditions were to prevail and it is determined that the allowance is not adequate to absorb the new estimate of probable losses, an additional provision for loan losses would be made, which amount may be material to the financial statements.  Impact of inflation and changing prices and seasonality  The financial statements in this document have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars, without consideration of changes in the relative purchasing power of money over time due to inflation.  Unlike industrial companies, most of the assets and liabilities of a financial institution are monetary in nature.  As a result, interest rates have a more significant impact on a financial institutions performance than the effects of general levels of inflation.  Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services, since such prices are affected by inflation.   25    ITEM 3  CONTROLS AND PROCEDURES  Based upon an evaluation as of June 30, 2006 under the supervision and with the participation of the Companys Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of the Companys disclosure controls and procedures, they have concluded that our disclosure controls and procedures, as defined in Rule 13a-15 under the Securities Exchange Act of 1934, as amended, are effective in ensuring that all material information required to be disclosed in reports that it files or submits under such Act are made known to them in a timely fashion.  Our management is also responsible for establishing and maintaining adequate internal control over financial reporting.  There were no changes in our internal control over financial reporting identified in connection with the evaluation of it that occurred during the Companys last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.     26    PART II  OTHER INFORMATION   ITEM 1  LEGAL PROCEEDINGS   Not applicable.   ITEM 2  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS   Not applicable.   ITEM 3  DEFAULTS UPON SENIOR SECURITIES   Not applicable.   ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS   The Company held its 2006 Annual Meeting of Shareholders on Tuesday, May 23, 2006 at 10:00 a.m. at the Salisbury Country Club, 13620 Salisbury Road, Midlothian, Virginia.  There were 1,642,998 shares represented in person or by proxy, which represented 87.1% of the outstanding shares.  There was a quorum for all purposes.  The shareholders were asked to vote on the election of three directors of the Company for a term of three years each, to approve the Companys Incentive Plan, as amended and restated, and to ratify the appointment of the independent registered public accounting firm for the Company for 2006.  The votes cast for or withheld for the election of directors were as follows:  Name For Withheld  Class C Directors: Donald J. Balzer, Jr. 1,637,798 5,200 Dean T. Patrick 1,635,298 7,700 Michael L. Toalson 1,634,698 8,300  The votes cast for, against or abstain and broker non-votes to approve the Companys Incentive Plan, as amended and restated, were as follows:  For Against Abstain Broker Non-Votes 928,997 124,431 589,570 609,020  27  The votes cast for, against or abstain to ratify the appointment of BDO Seidman, LLP as independent registered public accounting firm for the Company for 2005 were as follows:  For Against Abstain 1,614,248 1,100 27,650  There were no broker non-votes in connection with the ratification of the appointment of BDO Seidman, LLP.   ITEM 5  OTHER INFORMATION   Not applicable.   ITEM 6  EXHIBITS  10.1 Incentive Plan, as amended and restated (as of May 23, 2006)  31.1 Certification of Chief Executive Officer  31.2 Certification of Chief Financial Officer  32.1 Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350     28    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.   VILLAGE BANK AND TRUST FINANCIAL CORP. (Registrant)    Date:  August 11, 2006 By: /s/ Thomas W. Winfree Thomas W. Winfree President and Chief Executive Officer   Date:  August 11, 2006 By: /s/ C. Harril Whitehurst, Jr. C. Harril Whitehurst, Jr. Senior Vice President and Chief Financial Officer    29    Exhibit Index   Exhibit Number Document  10.1 Incentive Plan, as amended and restated (as of May 23, 2006)  31.1 Certification of Chief Executive Officer  31.2 Certification of Chief Financial Officer  32.1 Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350  30